Diversification B290 Diversification Diversification: –The entry into product markets in which the...
-
Upload
oscar-young -
Category
Documents
-
view
215 -
download
0
Transcript of Diversification B290 Diversification Diversification: –The entry into product markets in which the...
![Page 1: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/1.jpg)
![Page 2: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/2.jpg)
DiversificationDiversification
B290
![Page 3: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/3.jpg)
Diversification
• Diversification:– The entry into product markets in which
the firm has had no prior activities, e.g. • Sprits from beer (Whitbread)• Bricks, coal mining (Hanson)• Computers from HiFi (Sony)
• 1960s and 1970s saw the rise of the conglomerate (a large, highly diversified firm)– e.g. ITT, Beatrice Foods, Greyhound
![Page 4: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/4.jpg)
Returns to Diversification
• Conglomerates’ shares generally trade for less than the value of the component businesses– The “Conglomerate Discount”
• (Most large acquisitions don’t make money for the acquiring firm)
![Page 5: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/5.jpg)
Rationale
• Not good reasons for diversifying…– Revenue growth• Not always accompanied by profit growth
– Risk pooling (predictable cash-flows)• Markets do a better job
– Profit growth• Not always accompanied sustained
profitability
![Page 6: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/6.jpg)
Types of diversification
• Two kinds of diversification: – Related – lines of business that share some common input,
resource, or market• economies of scale – sharing production capacity (e.g.
Bombardier)
• economies of scope – sharing / combining capabilities (e.g. Canon, Honda)
• Exploiting distinctive competencies (=> a core competence )
– Unrelated – no linkage between lines of business • Exploiting general managerial expertise
• Turning around underperforming firms
• Related is marginally more profitable
![Page 7: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/7.jpg)
Ways of diversifying
• Organic– The firm sets up its own operation in
the industry into which it wants to move
• Through Acquisition– The firm buys an existing firm in the
industry into which it wants to move
![Page 8: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/8.jpg)
IBM mainframe and peripherals
3284 dot matrix printer
4380 Cartridge tapedrives
3880 DASD(12GB)
3083 CPU3705 Communications controller
3800 pageprinter
4332 line printer
3274 Terminal controller
3278, 3178 Displays http://www-1.ibm.com/ibm/history/exhibits/mainframe/mainframe_album.html
![Page 9: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/9.jpg)
The mainframe value chain
Mainframe
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor
Vertica
l Inte
gra
tion
![Page 10: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/10.jpg)
The ‘IBM’ PC value chain
P.C.
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor CDRom
IBM IBM
Vertica
l Inte
gra
tion
![Page 11: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/11.jpg)
The ‘IBM’ PC value chain
P.C.
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor CDRomIBMIntelNEC
IBMSeagateConnor
IBM IBM
IBMIntelAMD
Vertica
l Inte
gra
tion
![Page 12: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/12.jpg)
The ‘IBM’ PC value chain
P.C.
Consumer
Retail Distribution
Business Customer
B2B Distribution
MotorPlatter Disc. Elec. CompCRT
Memory CPU Disk Monitor CDRomIBMIntelNEC
IBMSeagateConnor Sony
SonySony
Sony
IBM IBM
IBMIntelAMD
Sony
Vertica
l Inte
gra
tion
Sony’s related diversification
TV HiFi
Sony
![Page 13: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/13.jpg)
Cost of coordination
Cost
Number of bus. units
Cost
Conglomerates and Unrelated diversification
Related diversification1063
432
Number of bus. units
![Page 14: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/14.jpg)
Coordination problems
“I tried to review each plan in great detail. This effort took untold hours and placed a tremendous burden on the corporate executive office. After a while I began to realize that no matter how hard we would work we could not achieve the necessary in-depth understanding of the 40-odd business unit plans.”
Reg Jones, CEO, General Electric, 1972 to 1981
![Page 15: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/15.jpg)
Summary
• Diversification creates coordination costs
• Related diversification – More profitable than unrelated diversification
– Should exploit economies of scale • common productive capacity, markets or inputs,
– or economies of scope• exploiting a distinctive competence
• Unrelated diversification– “Fixing” underperforming firms
• Not for appropriate – For risk pooling alone
– Top line growth at the expense of profits
– Bottom line growth at the expense of RoE
![Page 16: Diversification B290 Diversification Diversification: –The entry into product markets in which the firm has had no prior activities, e.g. Sprits from.](https://reader036.fdocuments.us/reader036/viewer/2022062804/56649e315503460f94b228d3/html5/thumbnails/16.jpg)